Tealwood’s investment philosophy concentrates on five investment factors that provide consistent, meaningful advantages. These factors include:
- Play a long game. Stay out of the short term, serial tactical sprints approach.
- Fundamentals win the long game. The cohort of better businesses consistently deliver better results.
- Paying fair and discounted prices provides a margin of safety. Investing at premium prices decreases margin of safety and subjects you to the risks of inevitable regression to the mean.
- A Rational Approach about the above makes a significant difference over an emotional rollercoaster reaction based on fear and greed. As advisors, we are committed to sustaining our focus on rational investing.
- Planning and personalized strategy are your game changer. This includes customizing asset allocation for an individually appropriate balance of offense and defense.
Human nature and the market narrative are both subject to:
- A short-term time horizon,
- The million different variables that influence the reaction du jour,
- Following the herd without consideration of a margin of safety, and
- Defaulting to the emotional roller coaster with only mild self-awareness.
- Separating your thinking from the influences of human nature and the day’s market narrative is a constant, demanding challenge. To flourish and thrive as an investor requires a discipline to focus on the durable advantages and to resist the siren’s song – a discipline we are committed to.
The difference between being optimistic and being selectively positive:
How do you go about putting these advantages to work in this sloppy marketplace? We recognize there are serious, strategic issues to deal with, such as inflation, froth, deficits/debt, and geopolitical conflict. We are not dismissive of these threats. We want to be explicit about saying that the factors that have stressed the market since last September are likely to continue to stress the market for several more years. We anticipate that risk and reward will coexist in an environment of rising interest rates, higher inflation, valuation correction, economic expansion, labor disequilibrium, and earnings growth. We expect that the economic impact of the pandemic will continue to decline.
Historically, equities as an asset class have delivered on preserving purchasing power and better real returns adjusted for inflation. It is realistic to assume that the better-than-historical-averages result of the last three years are unlikely to continue apace. It is also realistic to think that the relative return from stocks will be better than other asset classes over the next five years.
Within equities, we concentrate on a cohort of better businesses. These companies typically have wider moats and competitive advantages as well as the better business models with exceptional balance sheets with superior profitability. In addition to the advantages of sector and Industry tailwinds.
In the first quarter of 2022, we saw the start of a predictable valuation correction in the Tech sector, and we expect there is more of that to come. However, please do not equate froth management with sector bearishness. The absolute performance of the Tech sector may regress, but the relative outperformance is likely to persist. Many of the world’s best opportunities lie ahead in technology. We want to participate but do so in ways consistent with our emphasis on quality and reasonable price.
Managing Unforced Errors
It is also important to avoid the consequences of allocating to low quality businesses that do not have durable competitive advantages. While it is obvious that the Oil and Gas stocks have had a market best run, it is also factual that the Energy sector has been the market’s worst performing sector over the last ten years with the highest risk drawdowns. We expect that the short-term dislocations that have created this spike in the commodity price are just that – short term dislocations. We also expect that a return to lower commodity prices is in the cards.
Regarding geopolitical risks, we must start with our basic human responses, such as compassion for the sufferings of the Ukrainian people and admiration for their courage and grit. While Russia’s invasion of Ukraine is disruptive from an investment perspective, it is not (yet) game changing. If the stakes increase (nuclear caveat), we will reassess; but with a five-year outlook we are not changing the way we invest because of this conflict.
We address the issues that confront the bond market and the fixed income investor in a separate piece in this newsletter. Please refer to it for that aspect of our strategy.
We are confident that we can serve you best by playing a long game, concentrating on the higher quality cohort of better businesses, investing at reasonable prices, and acting as rational investors.
